Abstract: The current international economic and trade situation is complex and severe. All countries pay close attention to export controls and take an active approach to strengthening and standardizing their approach by establishing and enforcing measures through their legal systems. In this context, Export Control Law of the People’s Republic of China came into effect on December 1, 2020. On December 29, 2021, China released its first white paper on export control, which reflects China’s strategic and legislative response to the current situation. However, it will take time for implement the legislation, amendment, and abolishment and specific measure of the relevant complementary provisions of the Export Control Law. During the transition period, when the compliance of enterprise encounters export control, it will cause a lot of confusion. Based on the above, we systematically summarized the status of China’s export control legal system, technology export control and how the Customs supervises export control items in the last issue of Customs Notes. In this issue, we will focus on the ten circumstances and liabilities of violating China’s Export Control Law and how to respond to Customs compliance risks.

Key words：China's export control, legal liability, Customs compliance

On December 29, 2021, China released China Export Controls white paper for the first time, which released China’s firm determination to continue to pay close attention to and take active approaches to export control governance to safeguard national security and interests. The white paper affirms the strategic and legislative significance of the previously promulgated Export Control Law in the establishment of China’s export control system, basic institutional framework, and rules. We introduced this in the last issue of Customs Notes, this Note will focus on the ten circumstances and legal liabilities of violating China’s Export Control Law, and how to prevent Customs compliance risks.

(I)provisions about illegal circumstances

Article 33 to 38 and Article 44 Export Control Law of the People’s Republic of China (hereinafter referred to as the Export Control Law) stipulate ten illegal circumstances. Among them, the Export Control Law stipulates specific legal liabilities for the other nine illegal circumstances, except for the illegal circumstances in which overseas entities endanger national security and interests of the People’s Republic of China or hinder the fulfillment of such international obligations as non-proliferation in Article 44.

（II）Graphical overview of 10 illegal circumstances

The author summarizes and refines the illegal circumstances stipulated in the Export Control Law, as shown in graphic 1:

Graphic 1: Ten circumstances of violating the Export Control Law

There are corresponding penalties for the nine circumstances (1) to (9) in the graphic, and the exporter is the most responsible subject for illegal acts. However, subjects engaged in services such as agency, freight, delivery, customs declaration, etc., may also become responsible subject under specified circumstances (Article36).

The tenth illegal circumstance in the graphic, that is, Article 44 stipulates the extraterritorial effect of the Export Control Law. It reads “Where any organization or individual outside the territory of the People's Republic of China, in violation of the provisions of the present Law on the administration of export control, endangers the national security and interests of the People's Republic of China or hinders the fulfillment of such international obligations as non- proliferation, it/he shall be dealt with in accordance with the law and investigated for legal liability.” How to deal with it according to law and pursue legal responsibility needs to be further followed up.

The legal liability for violation of Export Control Law mainly includes administrative liability and criminal liability. From the perspective of the responsible subject, it includes not only enterprises but also individuals (the person directly in charge and other persons directly liable).

(I) Administrative liability

1. Possible administrative liability

Graphic 2: Possible administrative liabilities for violating the Export Control Law

As shown in graphic 2, administrative liabilities for violating the Export Control Law mainly include administrative penalties, such as warning, ordering to cease the illegal acts, confiscating illegal gains, fine, suspending business for rectification, disqualifying in the monopoly for export and restriction or prohibition on export. In addition, relevant violations are included in the credit record, etc.

(1) The possible administrative liabilities cover almost all types of administrative penalties.

According to Article 9 of Administrative Penalty Law of the People’s Republic of China, the types of administrative penalty shall include: (a) warning and circulating a notice of criticism; (b) fine, confiscation of illegal gains or illegal property; (c) temporary suspension of the permit or certificate, downgrading of qualification or revocation of the permit or certificate; (d) restriction on the conduct of production and operation activities, ordering for suspension of production and operation, ordering for closedown or restriction on practice; (e) administrative detention; and (f) other administrative penalty as prescribed by laws and administrative rules and regulations.

The administrative liabilities for violating the Export Control Law cover almost all types of administrative penalties. Thereinto, fine is the most used penalty method. Compared with the Implementation Regulation of the Customs of the People’s Republic China on Administrative Penalties, the amount of fine is relatively high which can be up to 20 times illegal turnover, and the permit or certificate of relevant controlled items can be revoked.

(2) In addition to administrative penalties, administrative liability also includes illegal acts into credit record.

According to Article 39 of the Export Control Law, the exporter is punished for violation of the provisions of the Export Control Law, whose violations will be included into the credit record and the State’s export control authorities may refuse to accept its application for export license within five years from the date when the punishment decision takes effect.

What are the serious consequences for the enterprise after being included in the credit record? Taking the customs supervision field as an example, according to the Administrative Measures of the Customs on Trustworthiness of Registered/Filed Enterprises and relevant regulations, the illegal act conducted by the enterprise is included in the credit record, which may cause the trustworthiness ratings of the enterprise to be lowered to a dishonest enterprise, or even serious dishonest enterprise. Once it becomes a dishonest enterprise, the customs will severely punish the dishonest enterprise in terms of increasing the inspection rate and increasing the frequency of inspection or verification for the enterprise. If it becomes a serious dishonest enterprise, the customs will also notify other departments such as the Administration for Industry and Commerce, Administration of taxation, and banking. The consequences are all-encompassing, cross-cutting, and catastrophic.

(3) Managers may personally bear administrative liability and even criminal responsibility

It should be noted that in violation of the Export Control Law, not only the exporter shall bear the corresponding legal liability, but the person directly in charge and other persons directly liable in the enterprise may also bear the administrative liability and even the criminal liability. For example, the State's export control authorities may prohibit the person directly in charge and other persons directly liable from engaging in the relevant export business activities for five years. Anyone who has been criminally punished due to irregularities in export control shall be banned from engaging in the relevant export operation activities for life.

（II）Criminal liability

1. If the illegal acts of violating the Export Control Law constitute a crime, the relevant subject will bear criminal liability in accordance with the provisions of the Criminal Law.

2. Violating the Export Control Law may lead to different charges including the crime of smuggling, the crime of illegal business operations, the crime of intentionally divulging state secrets, and the crime of forging, altering, buying or selling the official documents, certificates or seals of state organ, etc.

3. Those who violate the Export Control Law and constitute a crime may bear criminal liabilities such as fines, confiscation of property, fixed-term imprisonment, and life imprisonment, etc.

(III) Comments

The export control law is relatively strict in terms of liability for violations, which in a sense releases the strategic determination to safeguard national security and interests by increasing penalties for violations. Enterprise managers should have a clear understanding of this, and try to reflect the company's management's compliance with export control laws, in terms of compliance institutions and staffing, internal work processes and system settings, etc. In addition, effective compliance mechanisms play a supervisory and restraint role in system design and process control. Once a compliance investigation is encountered, it will help to draw a line of responsibility between the individual's wrongdoing and the company.

III. Tips for response to export control compliance risks

(I) Basis for Customs penalty for illegal acts of violating the Export Control Law

1.Article 40 of the Export Control Law stipulates “Any illegal act under export control as provided for in the present Law shall be punished by the State's export control authorities; where laws and administrative regulations provide that punishment shall be imposed by the Customs, the punishment shall be imposed by the Customs in accordance with the present Law.”

2. The Customs is empowered to impose penalties on relevant export control illegal acts by Customs Law of the People’s Republic of China and Implementation Regulations of the Customs of the People's Republic of China on Administrative Penalties.

3. Although the Export Control Law, Customs Law and Implementation Regulations on Customs Administrative Penalties all give the Customs the power to investigate and punish violations of export control. However, the current provisions of Article 40 of the Export Control Law have not yet been clarified as to how to divide the punishment powers of different departments in specific law enforcement, and how to connect and apply different legal provisions.

（II）Tips for enterprise compliance

Although in the law enforcement, the Customs’ inspection, and verification of illegal acts according to the Export Control Law may have the problems of the concurrence of laws and regulations and authorities for imposing penalties which are stipulated in the Implementation Regulations on Custom Administrative Penalties. It is clear that the Customs has the power to inspect and impose administrative penalties on export control violations. For enterprises, it is necessary to pay attention to the response to customs compliance risk of export control. We give three tips and explain them one by one.

Graphic3: Three tips for compliance

Tip 1: Effective compliance mechanism are conductive to prevent compliance risks or mitigate liability

On the one hand, the concept of “facilitation for law abiding and punishment on violations of law” has been deeply rooted in the hearts of the people. Establishing an effective compliance mechanism to prevent or resolve risks encountered in business operations through compliance management is an independent requirement for enterprises aiming for long-term stability and stable development.

On the other hand, from the perspective of external supervision, whether in the field of customs supervision or the field of export control, the competent authorities have also continued to confirm the above concepts through legislation or issuing guidance documents. For example:

Tip 2: An effective compliance mechanism helps enterprises enjoy licensing convenience

Take Customs supervision and export control for examples.

In the field of Customs supervision, it is the core idea of Customs enterprise management system to “facilitation for honesty and law abiding, punishment on dishonesty and violations of laws”. The Customs will carry out classified management according to the credit of enterprises, provide simplified procedures for advanced certified enterprise (AEO), reduce the frequency of inspection and verification, and implement many convenient measures such as tax incentives. For dishonest enterprises to be punished, once listed in the list of serious dishonest enterprises, but also the implementation of cross-department joint punishment.

In the field of export control, the No.10 Announcement of the Ministry of Commerce stipulates that providing the exporters with the corresponding licensing facilitation in accordance with the development and operation of the internal compliance mechanism. This is the direct embodiment of the enterprise credit management concept in the field of export control. On the one hand, all the credit records of exporters may become important factors to be considered by the national export control authorities when examining and approving their export controlled items license applications. On the other hand, the compliance performance of an enterprise in the field of export control may also be included in the credit record of the enterprise. Once an enterprise violates the relevant provisions of export control, it will also have adverse effects in other regulatory areas.

Tip 3: The essential elements of an effective compliance mechanism

What are the basic elements for an enterprise to establish an effective compliance mechanism? In this regard, we can refer to the No.10 Announcement of the Ministry of Commerce, which defines nine basic elements for the internal compliance mechanism of export control (see Figure 5)

Figure 5: Nine basic elements of an effective compliance mechanism

(1) Drafting a policy statement

Core requirements: The exporter shall formulate and issue a written statement of commitment signed by the top management or the main person in charge, stating that the operator will strictly implement the national export control laws and regulations, and the senior management's supportive attitude towards the internal compliance mechanism, so as to reflect the principle of legality.

Comments: This element mainly considers the attitude of senior management towards compliance mechanism, and the form is written statement of commitment. This also reflects the official attitude that export control compliance construction should be led by the senior management of the enterprise, and the senior management is the first responsible person.

(2) Establishing an organizational structure

Core requirements: Set up an organization for internal compliance mechanism of export control, and clarify the responsibilities of competent department and personnel. The organizational structure to be established shall reflect the principle of independence, and earmarked personnel shall be authorized to issue bans against any export- related act in dispute or to consult the competent government departments.

Comments: This element is the official requirement for the establishment of compliance organization and personnel of the enterprise, and shows the independence principle of compliance posts or compliance personnel in the organizational structure of the enterprise.

(3) Comprehensive risk assessment

Core requirements: Identify business links prone to non-compliance risks, match the compliance resources and contents of examination based on the risk level. The enterprise may, in light of the results of risk assessment, establish and update their internal compliance mechanism and relevant organizational management system for export control that are suitable for their own characteristics, and sort out and analyze the risk prevention measures that can be taken.

Comments: Comprehensive risk assessment is a process of self-examination and also the basis of establishing an effective compliance mechanism. The assessment scope includes not only whether the items fall into the control list, whether the trading party and the third party fall into the control list, whether the technology and research and development involve export control, but also whether the internal work process is set up reasonably and smoothly, etc. It is efficient to rely on external professional forces.

(4) Establishing examination procedures

Core requirements: Clarify the specific links that are subject to internal compliance control in the process of operation, and shall, through procedural and systematic management, prevent the export of controlled items without internal examination.

Comments: This element involves the workflow and system setting of enterprise compliance control. How to integrate the compliance review procedure into the existing working mechanism or process is an issue that needs to be paid attention to.

(5) Developing emergency measures

Core requirements: Set up internal reporting channels and suspicious matters investigation procedure; Remedial measures.

Comments: This element involves activating the contingency plan, and how to remedy the errors, and how to minimize the loss of the enterprise. In practice, it often involves consulting lawyers and inviting outside forces to intervene in the stop-loss issue.

(6) Providing education and training

Core requirements: The exporters shall, work out regular or irregular training plans, adopt various forms of training to realize all-staff training, and include the export control training as an indicator for the performance assessment of their employees.

Comments: The training needs to cover personnel at different positions and levels to form a long-term mechanism.

(7) Improving compliance audit

Core requirements: The exporters shall regularly audit the reasonableness, feasibility and effectiveness of the internal compliance mechanism of export control so as to assess the standardization of compliance operation in specific business process. The audit shall mainly include whether the examination procedures have been followed in the transaction of various dual-use items, whether the operation of the organizational structure is smooth, whether the investigation into suspicious matters is effective, and whether there are areas for improvement in respect of compliance matters.

Comments: This element is the evaluation and review of the compliance mechanism.

(8) Retention of data files

Core requirements: The exporters shall keep complete and accurate documents related to export control. Contact via telephone, fax, e-mail and other means shall be recorded as the case may be, and the filing procedures and keeping requirements for relevant trade documents shall be clarified.

Comments: The preservation of data is related to the proof that enterprises claim their own rights and interests, which is a very important thing. In accordance with the requirements of the Export Control Law, the relevant data shall be kept for at least 5 years.

(9) Preparing management manuals

Core requirements: The management manuals shall cover the contents stipulated by the aforementioned basic elements, popularize the national laws, regulations and compliance systems of export control, so as to enable their staff to timely understand and effectively related regulations through such manuals.

Comments: Compliance manual is the achievement solidification of enterprise compliance mechanism. It not only provides guidance for employees’ operation, but also serves as a way for enterprises to prove their compliance attitude and show compliance results.

1. Enterprise operation needs to pay attention to the compliance requirements of different management fields and regulatory departments. Even if adhering to the concept of compliance operation, facing the current situation of complicated and multi-management, overlapping responsibilities of different management departments and different management systems, it is difficult for enterprises not to fall into confusion and anxiety, but in any case, efforts to establish internal compliance mechanism is the fundamental of constant response to all changes.

2. Establishing an effective compliance mechanism is not only required by law, but also a magic weapon for enterprises to enjoy licensing convenience and enhance comprehensive competitiveness. It is also an effective means for enterprises and even managers to prevent compliance risks or reduce illegal liability.

3. Establishing an effective compliance mechanism is a process of constant exploration, review and adjustment. Enterprises can refer to the relevant guidance and framework of the No.10 Announcement of the Ministry of Commerce, as well as the relevant framework of the enterprise standards for advanced Customs certification. They also need to comprehensively consider the current situation and development potential of enterprises and embed export control compliance elements, so as to maximize the role of existing institutional experience and management system.

4. Enterprises' attitude and actions towards compliance should also be presented in a visual way. It is a better way to formulate a compliance manual in practice. The compliance manual shows the compliance results of the enterprise externally, which can be used as evidence for the company to fulfill its compliance obligations. It is also helpful for personnel training and compliance internally.